Bank stocks dropped as new Basel rules eat into dividends

Australian investors cut their stock holdings in the nation's three largest banks to a six-month low in May as new capital rules diminish the likelihood of increased dividends.

Domestic institutional and individual shareholders trimmed their stakes in Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp. by a mean of 4.5 percentage points this year up to June 3, taking their average holding in the three to 47 per cent, data compiled by Bloomberg show.

NAB, with the lowest loan margins of the three, was reduced the most by 6.2 percentage points, the data show.

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Local investors are selling the banks' shares, which account for about a quarter of the benchmark S&P/ASX 200 Index, as concern their rallies to record highs had outrun prospects for higher dividends and a mortgage-lending recovery.

The Australian regulator outlined additional capital requirements in the past six months to comply with global Basel regulations.

"The story for the banks is not as positive as it was before," said Shane Oliver, who oversees about $133 billion as head of investment strategy at AMP Capital.

"It does make sense to have a decent exposure to the banks, but not at the same level as before. As time goes by, it's going to be difficult to increase the dividends because of the capital adequacy ratio."

AMP, Australia's largest publicly traded fund manager, lowered its bank holdings to a neutral position since late last year, Oliver said, meaning the firm now holds about the same amount of stock as is represented in benchmark indexes. His firm was previously overweight.

The S&P/ASX 200 Banks Index surged 29 per cent last year, the most since 2009, as speculation rose record profits would allow lenders to bolster dividend yields that are already the highest in the developed world, data compiled by Bloomberg show.

The stock gauge's gains eased to 2.7 per cent this year after the Australian Prudential Regulation Authority told the biggest banks on Dec. 23 to carry an extra 1 per cent of core Tier 1 capital from Jan. 1, 2016, due to their systemically important status.

APRA said May 5 it will phase out by December 2017 any capital benefits derived from debt issued by the lenders' wealth-management units. By then, the banks will need to convert certain debt held by the subsidiaries into equity in the businesses, resulting in the need to add more capital.

Australians owned 37.3 per cent of NAB, saddled with a UK business that has dragged on profitability, as of June 3, down from 43.5 per cent at the end of last year, data compiled by Bloomberg show. They cut holdings of CBA, which reached a record on June 2, by 2.1 percentage points this year and lowered

Westpac by 5.1 percentage points, the data show.

Some of those shares are being bought by US investors still lured by the average 5.2 per cent dividend yield offered by CBA, NAB and Westpac. While that yield is down from 7.1 per cent at the end of the lenders' 2008 business years, it's above the 3.6 per cent paid out by the largest Canadian banks, and 1.5 per cent in the US, the data show.